What is the difference between fiscal deficits and structural deficits?

Fiscal deficits—government outlays less tax receipts—react to business cycle shocks such as technology, demographics, commodity prices and political uncertainty. The portion of a deficit that is due to the level of economic activity is called the cyclical deficit, while the structural deficit is the shortfall that would exist even if the level of economic output were at its potential. Cyclical deficits do not threaten long-term fiscal solvency because they will be reversed over time. Large structural deficits, however, cannot be maintained forever and might require adjustments to tax and spending policies.

What causes structural deficits?

Structural deficits change with tax and spending choices that are unrelated to economic conditions. For example, the U.S. deficit rose in 1992 when savings and loan depositors were bailed out. And the terrorist attacks of Sept. 11, 2001, and wars in Afghanistan and Iraq increased the U.S. deficit through higher defense and homeland security expenditures. The U.S. deficit in 2002 (3.4 percent of GDP) was mostly structural (2.9 percent), not cyclical.

This information was adapted from "Global Factors in Budget Deficits," which was written by Christopher J.Neely and appeared in the November 2003 issue of International Economic Trends, a St. Louis Fed publication.